From the beginning of 2022, however, a strong increase in food and energy prices has occurred and caused an upsurge in the monthly inflation rate to 4.3 percent in January 2023, the highest value in decades. Although the monthly rate has since declined to around three percent, the Consumer Price Index (CPI) has continued an upward trajectory and strained the nation's household economy.
In 2022, the Japanese government spent approximately 45 trillion Japanese yen on economic relief measures to mitigate fuel, gas, and electricity prices, as well as to subsidize low-income families. The government designated five trillion yen of its initial budget for countermeasures for surging price levels in 2023.
Deflation to inflation, and stagflation scare
After the economic recession in the early 1990s, Japan’s CPI indicated a deflation line until the middle of the 2010s. After that period, the country’s inflation rate fluctuated but remained below one percent, except in 2014 (2.7 percent), until the strong rise in 2022.Economists have warned that Japan is at the risk of "stagflation" if the current increase in consumer prices persists. Stagflation occurs when there is a lack of growth in the economy while prices hike, typically due to a high unemployment rate. In Japan’s case, the risks of stagflation are mainly attributed to a combination of low wage rates with consequently lower purchasing power of citizens when prices for commodities increase.
Business enterprises in Japan, especially small to medium-sized companies (SMEs), have struggles raising wages due to rising material costs and low labor productivity levels. To promote substantial earnings growth and alleviate the gap with high commodity prices, the Japanese government announced aid campaigns for SMEs in 2023.
Weaker Japanese yen
To support the economy and reduce the accumulated national debt, the government and the central bank, the Bank of Japan, have adopted a monetary policy since the 2010s that differs from most other developed countries. While other nations raised interest rates along with the rising inflation rates in recent years, Japan kept its credit-easing policy and maintained its minimized interest rates. This has resulted in the depreciation of the Japanese yen and an increase in import costs.While Japan can benefit from lower export charges with the declined exchange rate, it might not stimulate the economy as it did in the past, as Japan’s manufacturing industry has reduced its competitive strength, and its export has slowed over the last decades. A prolonged period of a weak yen can further pressure the nation’s finances, and the government is currently at a critical point of weighing the risks of adjusting interest rates.
